OPEN JOINT STOCK COMPANY BELAGROPROMBANK

Transcription

1 OPEN JOINT STOCK COMPANY BELAGROPROMBANK Independent Auditors Report Consolidated Financial Statements For the year ended

2 OPEN JOINT STOCK COMPANY BELAGROPROMBANK TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS 1 INDEPENDENT AUDITORS REPORT 2-3 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER : Consolidated income statement 4 Consolidated balance sheet 5 Consolidated statement of changes in equity 6 Consolidated statement of cash flows 7-8 Notes to the consolidated financial statements 9-49

3 STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER The following statement, which should be read in conjunction with the independent auditors responsibilities stated in the independent auditors report set out on page 2-3, is made with a view to distinguishing the respective responsibilities of management and those of the independent auditors in relation to the consolidated financial statements of Open Joint Stock Company Belagroprombank (the Bank ) and its subsidiaries (the Group ). Management is responsible for the preparation of the consolidated financial statements that present fairly the financial position of the Group as of, the results of its operations, cash flows and changes in equity for the year then ended, in accordance with International Financial Reporting Standards ( IFRS ). In preparing the consolidated financial statements, management is responsible for: Selecting suitable accounting principles and applying them consistently; Making judgments and estimates that are reasonable and prudent; Stating whether IFRS have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and Preparing the consolidated financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue its business for the foreseeable future. Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; Maintaining proper accounting records that disclose, with reasonable accuracy, the financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; Maintaining statutory accounting records in compliance with legislation of the Republic of Belarus; Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Detecting and preventing fraud, errors and other irregularities. The consolidated financial statements for the year ended were authorized for issue on 8 May 2007 by the management of the Bank. On behalf of the Management: Chairman Chief Accountant 8 May May 2007

4 Foreign Enterprise Deloitte & Touche 51 Korolya Street Minsk, Belarus Tel.: +375 (0) Fax: +375 (0) INDEPENDENT AUDITORS REPORT To the Shareholders and Supervisory Council of the Open Joint Stock Company Belagroprombank : We have audited the accompanying consolidated financial statements of the Open Joint Stock Company Belagroprombank and its subsidiaries (the Group ), which comprise the balance sheet as of, and the income statement, statements of changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Member of Deloitte Touche Tohmatsu

5 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects the financial position of the Group as of, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Without qualifying our opinion, we draw attention to Note 3, describing the restatement effect of consolidation of a subsidiary as of. Without qualifying our opinion, we draw attention to Note 15, disclosing the fact that due to the absence of a market for financial instruments having substantially the same terms and characteristics as the machinery and housing loans granted to agricultural enterprises under the program of the Government of the Republic of Belarus on agricultural sector financing, there is a considerable degree of uncertainty surrounding the determination of the market interest rate used to measure the loans and respective contributions to the share capital of the Bank at fair value at initial recognition. Without qualifying our opinion, we draw attention to Note 31, describing uncertainties currently existing in the economic environment in the Republic of Belarus. 8 May 2007 Minsk 3

6 OPEN JOINT STOCK COMPANY BELAGROPROMBANK CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER (in millions of Belarusian Roubles) Notes Year ended Year ended (restated) Interest income 5, , ,545 Interest expense 5, 27 (247,939) (150,051) NET INTEREST INCOME BEFORE PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 188, ,494 Initial recognition adjustment on interest bearing assets (13,557) (13,068) Provision for impairment losses on interest bearing assets 6, 27 (33,773) (16,082) NET INTEREST INCOME 141,133 98,344 Net gain on foreign exchange operations 7 37,137 14,316 Fee and commission income 8, , ,452 Fee and commission expense 8 (8,859) (4,766) Net realized (loss)/ gain on investments available for sale (451) 355 Other income 9 17,471 9,570 NET NON-INTEREST INCOME 179, ,927 OPERATING INCOME 320, ,271 OPERATING EXPENSES 10, 27 (203,162) (155,292) OPERATING PROFIT 117,727 67,979 Provision for impairment losses on other transactions 6 (2,595) (1,605) PROFIT BEFORE INCOME TAXES AND LOSS ON NET MONETARY POSITION 115,132 66,374 Loss on net monetary position due to inflation effect - (28,320) PROFIT BEFORE INCOME TAXES 115,132 38,054 Income taxes expense 11 (22,012) (31,053) NET PROFIT 93,120 7,001 Attributable to: Shareholders of the Bank 93,120 7,001 Minority interest - - On behalf of the Management: Chairman Chief Accountant 8 May May 2007 The notes on pages 9-49 form an integral part of these consolidated financial statements. The Independent Auditors Report is on page

7 OPEN JOINT STOCK COMPANY BELAGROPROMBANK CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER (in millions of Belarusian Roubles) Notes (restated) ASSETS: Cash and balances with the National Bank of the Republic of Belarus 12, , ,187 Due from banks 13, ,454 67,860 Precious metals 1,271 1,069 Derivative financial instruments 14 13,812 - Loans to customers 15, 27 3,712,374 1,907,897 Investments in securities 16, , ,469 Property, equipment and intangible assets , ,984 Current income tax assets 5,377 3,315 Other assets 18 29,605 16,590 TOTAL ASSETS 4,647,041 2,676,371 LIABILITIES AND EQUITY LIABILITIES: Due to the National Bank of the Republic of Belarus 19, , ,180 Due to banks 20, ,276 95,424 Derivative financial instruments 15 - Customer accounts 21, 27 2,417,787 1,454,641 Debt securities issued 22 15,744 6,889 Current income tax liabilities 1,387 1,674 Other liabilities 23, 27 40,354 21,072 Total liabilities 3,774,556 1,951,880 EQUITY: Share capital 24 1,033, ,525 Treasury shares (35) (35) Accumulated deficit (160,710) (251,999) Total equity attributable to shareholders of the Bank 872, ,491 Minority interest Total equity 872, ,491 TOTAL LIABILITIES AND EQUITY 4,647,041 2,676,371 On behalf of the Management: Chairman Chief Accountant 8 May May 2007 The notes on pages 9-49 form an integral part of these consolidated financial statements. The Independent Auditors Report is on page

8 OPEN JOINT STOCK COMPANY BELAGROPROMBANK CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER (in millions of Belarusian Roubles) Notes Share capital Treasur y shares Accumulated deficit Total equity attributable to shareholders of the Bank Minority interest Total equity ,711 - (255,603) 511, ,108 Share capital increase , , ,814 Net profit - - 1,180 1,180-1,180 Dividends declared for (3,397) (3,397) - (3,397) as previously reported 976,525 - (257,820) 718, ,705 Effect of consolidation of subsidiary - (35) 5,821 5,786-5,786 restated 976,525 (35) (251,999) 724, ,491 Share capital increase 24 56,605 - (17) 56,588-56,588 Dividends declared for (1,814) (1,814) - (1,814) Net profit ,120 93,120-93,120 Setting up of subsidiary ,033,130 (35) (160,710) 872, ,485 On behalf of the Management: Chairman Chief Accountant 8 May May 2007 The notes on pages 9-49 form an integral part of these consolidated financial statements. The Independent Auditors Report is on page

9 OPEN JOINT STOCK COMPANY BELAGROPROMBANK CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER (in millions of Belarusian Roubles) Notes Year ended Year ended (restated) CASH FLOWS FROM OPERATING ACTIVITIES: Profit before income taxes 115,132 66,374 Adjustments for: Provision for impairment losses on interest bearing assets 33,773 16,082 Provision for impairment losses on other transactions 2,595 1,605 Amortization of discount on loans to customers (26,626) (16,094) Fair value adjustment on loans upon initial recognition 13,557 13,068 Depreciation and amortization of property, equipment and intangible assets 10,548 7,753 Gain on disposal of property, equipment and intangible assets (664) (3) Write-down of inventory to net realizable value 1,184 - Change in interest accruals, net (5,120) (1,578) Change in commission accruals, net (316) 421 Gain of derivative financial instruments, net (13,797) - Translation differences, net 2,240 1,274 Discount on acquisition of subsidiary - (5,745) Change in present value of deferred consideration for subsidiary acquisition Cash flows from operating activities before changes in operating assets and liabilities 132,744 83,157 Changes in operating assets and liabilities Increase in operating assets: Minimum reserve deposit with the National Bank of the Republic of Belarus (575) (27,829) Due from banks (79,057) (29,483) Precious metals (202) (178) Loans to customers (1,905,791) (754,352) Other assets (6,145) (1,561) Increase in operating liabilities: Due to National Bank of the Republic of Belarus 160, ,325 Due to banks 654,912 17,530 Customer accounts 954, ,125 Other liabilities 13,383 1,151 Cash (outflow)/ inflow from operating activities before taxation (76,047) 140,885 Income taxes paid (24,361) (32,981) Net cash (outflow)/ inflow from operating activities (100,408) 107,904 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, equipment and intangible assets (38,697) (23,820) Proceeds on sale of property, equipment and intangible assets 1, Investment in subsidiary - (10) Payment of consideration for subsidiary acquisition (550) - Proceeds on sale and redemption of investments available for sale, net (61,543) (242,527) Net cash outflow from investing activities (98,871) (266,261) 7

10 OPEN JOINT STOCK COMPANY BELAGROPROMBANK CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER (in millions of Belarusian Roubles) Notes Year ended Year ended (restated) CASH FLOWS FROM FINANCING ACTIVITIES: Share capital increase , ,139 Dividends paid (1,814) (3,397) Cash received from minority Proceeds on issue/ (repayment) of debt securities issued, net 8,735 (19,623) Net cash inflow from financing activities 167, ,119 NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS (32,012) 36,762 EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 717 (1,064) INFLATION EFFECT ON CASH (INCLUDING CHANGE IN VALUATION ALLOWANCES) - (34,111) CASH AND CASH EQUIVALENTS, beginning of year , ,136 CASH AND CASH EQUIVALENTS, end of year 12 80, ,723 Interest paid and received by the Group during the year ended amounted to BYR 240,992 million and BYR 397,709 million, respectively. Interest paid and received by the Group during the year ended amounted to BYR 148,768 million and BYR 258,590 million, respectively. On behalf of the Management: Chairman Chief Accountant 8 May May 2007 The notes on pages 9-49 form an integral part of these consolidated financial statements. The Independent Auditors Report is on page

11 OPEN JOINT STOCK COMPANY BELAGROPROMBANK NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER (in millions of Belarusian Roubles unless otherwise stated) 1. ORGANISATION Open Joint Stock Company Belagroprombank ( the Bank ) was incorporated in the Republic of Belarus by the National Bank of the Republic of Belarus on 3 September The address of the Bank s registered office is 3 Zhukova avenue, Minsk, Republic of Belarus. The Bank provides wide range of banking services to its clients, which are mainly Belarusian enterprises. The Bank s primary areas of operations include granting loans to the agricultural and other sectors, processing customer accounts and customer payments. The Bank operates as the government agent in the realization of various government programs including financing of agriculture and subsidized construction of housing in rural areas. As of the Bank has a Special permit (license) for banking activities #2 issued 27 October by the National Bank of the Republic of Belarus, which allows it to maintain current accounts and attract demand and time deposits from private and corporate customers, to place the attracted funds in its right, to issue guarantees and carry out other banking operations as envisaged by the Banking Code. Bank also has license for professional and stock activity with securities. The Bank s organizational structure includes the Head Office, 6 Regional Banks, Minsk City Directorate, 121 local branch offices throughout the Republic of Belarus. As of and the structure of the Bank s share capital was the following: Shareholder Ministry of Economy of the Republic of Belarus 90.80% 86.88% Region Executive Committees 7.97% 11.38% Other 1.23% 1.74% Total % % The Bank is a parent company of a group (the Group ) which consists of the following enterprises consolidated in the financial statements: Name Country of registration and operation The Bank s ownership interest, % Type of operation PUE Ozeritskiy-Agro Republic of Belarus 100% 100% Agriculture JSC Agroleasing Republic of Belarus 66.7% n/a Finance leases 9

12 2. BASIS OF PRESENTATION Accounting basis These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board and Interpretations issued by the International Financial Reporting Interpretations Committee. These consolidated financial statements are presented in millions of Belarusian Roubles ( BYR ), unless otherwise indicated. These consolidated financial statements have been prepared under the historical cost convention except for the measurement of certain financial instruments at fair value and accounting for certain non-monetary assets that occurred before and are recognized according to International Accounting Standard 29 Financial Reporting in Hyperinflationary Economies ( IAS 29 ). In accordance with IAS 29 the economy of the Republic of Belarus was considered to be hyperinflationary during and prior years. Starting 1 January, the economy of the Republic of Belarus is no longer considered to be hyperinflationary and the values of the Group s non-monetary assets, liabilities and equity as stated in measuring units as of have formed the basis for the amounts carried forward to 1 January. The Group maintains its accounting records in accordance with the legislation of the Republic of Belarus. These consolidated financial statements have been prepared from the Belarusian statutory accounting records and have been adjusted to conform to IFRS. These adjustments include certain measurement adjustments and reclassifications to reflect the economic substance of underlying transactions including reclassifications of certain assets and liabilities, income and expenses to appropriate financial statement captions. Key assumptions The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Although these estimates are based on management s best knowledge of current events and actions, actual results could differ from these estimates. Estimates that are particularly susceptible to change relate to the provisions for losses and impairment and the fair value of financial instruments. Key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period include: Loans to customers 3,712,374 1,907,897 Equity investments Derivative financial instruments (assets) 13,812 - Derivative financial instruments (liabilities) 15 - Loans to customers and equity investments are measured at amortized cost/cost less allowance for impairment losses. The estimation of allowance for impairment losses involves an exercise of judgment. It is impracticable to assess the extent of the possible effects of key assumptions or other sources of uncertainty on these balances at the balance sheet date. 10

13 Functional currency The functional currency of these consolidated financial statements is the currency of the Republic of Belarus Belarusian Rouble. 3. SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements incorporate the financial statements of the Bank and the entities controlled by the Bank (its subsidiaries) made up to each year. Control is achieved where the Bank has the power to govern the financial and operating policies of an investee so as to obtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the consolidated income statement in the period of acquisition. The equity attributable to equity holders of the parent and net income attributable to minority shareholders interests are shown separately in the balance sheet and income statement, respectively. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Bank. All significant transactions, balances, income and expenses on transactions with the subsidiaries are eliminated on consolidation. Investments in associates An associate is an entity over which the Bank is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Bank s share of the net assets of the associate, less any impairment in the value of individual investments. Where the Bank transacts with an associate of the Bank, profits and losses are eliminated to the extent of the Bank s interest in the relevant associate. 11

14 Recognition and measurement of financial instruments The Group recognizes financial assets and liabilities on its balance sheet when it becomes a party to the contractual obligation of the instrument. Regular purchase and sale of the financial assets and liabilities are recognized using settlement date accounting. Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent remeasurement of these items are disclosed in the respective accounting policies set out below. Cash and cash equivalents Cash and cash equivalents include cash on hand, unrestricted balances on correspondent and time deposit accounts with the National Bank of the Republic of Belarus ( National Bank ) with original maturity within 90 days, loans and advances to banks in countries included in the Organization for Economic Cooperation and Development ( OECD ) with original maturity within 90 days, except for guarantee deposits and other restricted balances, which may be converted to cash within a short period of time. For purposes of determining cash flows, the minimum reserve deposit required by the National Bank of the Republic of Belarus is not included as a cash equivalent due to restrictions on its availability. Due from banks In the normal course of business, the Group maintains advances and deposits for various periods of time with other banks. Due to banks with fixed maturity are subsequently measured at amortized cost using the effective interest method. Those that do not have fixed maturities are carried at amortized cost based on expected maturities. Amounts due from banks are carried net of any allowance for impairment losses, if any. Repurchase and reverse repurchase agreements The Group enters into sale and purchase back agreements ( repos ) and purchase and sale back agreements ( reverse repos ) in the normal course of its business. Repos and reverse repos are utilized by the Bank as an element of its treasury management and trading business. A repo is an agreement to transfer a financial asset to another party in exchange for cash or other consideration and a concurrent obligation to reacquire the financial assets at a future date for an amount equal to the cash or other consideration exchanged plus interest. These agreements are accounted for as financing transactions. Financial assets sold under repo are retained in the consolidated financial statements and consideration received under these agreements is recorded as collateralized deposit received. Assets purchased under reverse repos are recorded in the consolidated financial statements as cash placed on deposit which is collateralized by securities and other assets. In the event that assets purchased under reverse repo are sold to third parties, the results are recorded with the gain or loss included in net gains/(losses) on respective assets. Any related income or expense arising from the pricing difference between purchase and sale of the underlying assets is recognized as interest income or expense. 12

15 Derivative financial instruments The Group enters into derivative financial instruments to manage currency and liquidity risks. Derivatives entered into by the Group include foreign currency forwards and swaps. Derivative financial instruments are initially recorded and subsequently measured at fair value. Fair values are obtained from the interest rates model. Most of the derivatives the Group enters into are of a short-term nature. The results of the valuation of derivatives are reported in assets (aggregate of positive market values) or liabilities (aggregate of negative market values), respectively. Both positive and negative valuation results are recognized in the consolidated income statement for the year in which they arise under net gain/ (loss) on foreign exchange operations for foreign currency derivatives. Loans to customers Loans to customers are non-derivative assets with fixed or determinable payments that are not quoted in an active market other than those classified in other categories of financial assets. Loans granted by the Group with fixed maturities are initially recognized at fair value plus related transaction costs. The difference between the nominal amount of consideration given and the amortized cost of loans issued at lower than market terms is recognized in the period the loan is issued as initial recognition adjustment. Discounting is performed using approximated market rates at inception and the adjustment is included in the income statement as reduction of interest income or netted off against fair value adjustment to contributions to share capital where the contributions represented the funds provided for the purpose of granting such loans. Write off of loans and advances Loans and advances are written off against allowance for impairment losses in case of uncollectibility of loans and advances, including through repossession of collateral. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Group and to sell all available collateral. In accordance with the Bank s policy, loans may only be written off with the approval of the Supervisory Board of the Bank. Allowance for impairment losses The Group establishes an allowance for losses on financial assets when there is objective evidence that a financial asset or group of financial assets is impaired. The allowance for impairment losses is measured as the difference between carrying amounts and the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted at the financial asset s original effective interest rate, for financial assets which are carried at amortized cost. If in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting an allowance account. For financial assets carried at cost the allowance for impairment losses is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed. The determination of the allowance for impairment losses is based on an analysis of the risk assets and reflects the amount which, in the judgment of management, is adequate to provide for losses incurred. Allowances are made as a result of an individual appraisal of risk for financial assets that are individually significant, and an individual or collective assessment for financial assets that are not individually significant. 13

16 The change in the allowance for impairment losses is charged to the consolidated income statement and the total of the allowance for impairment losses is deducted in arriving at assets as shown in balance sheet. Factors that the Group considers in determining whether it has objective evidence that an impairment loss has been incurred include information about the debtors or issuers liquidity, solvency and business and financial risk exposures, levels of and trends in delinquencies for similar financial assets, national and local economic trends and conditions, and the fair value of collateral and guarantees. These and other factors may, either individually or taken together, provide sufficient objective evidence that an impairment loss has been incurred in a financial asset or group of financial assets. It should be understood that estimates of losses involve an exercise of judgment. While it is possible that in particular periods the Group may sustain losses, which are substantial relative to the allowance for impairment losses, it is the judgment of management that the allowance for impairment losses is adequate to absorb losses incurred on the risk assets. Finance leases Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. The lease is classified as a finance lease if: The lease transfers ownership of the asset to the lessee by the end of the lease term; The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; The lease term is for the major part of the economic life of the asset even if title is not transferred; At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and The leased assets are of a specialized nature such that only the lessee can use them without major modifications being made. The Group as a lessor presents finance leases as loans and initially measures them in the amount equal to net investment in the lease. Subsequently the recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the Group s net investment in the finance lease. At the commencement of the lease term, the Group as a lessee recognizes finance leases as assets and liabilities in its balance sheet at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. Subsequently, the minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred. Depreciation of the lease property is charged in accordance with depreciation policy that is applied to property owned by the Group. Operating leases Leases of assets under which the risks and rewards of ownership are effectively retained with the lessor are classified as operating leases. Lease payments/income under operating leases are recognized as expenses/income on a straight-line basis over the lease term and included in operating expenses/income. 14

17 Investments available for sale Investments available for sale represent debt and equity investments that are intended to be held for an indefinite period of time. Such securities are initially recorded at fair value. Subsequently the securities are measured at fair value, with such re-measurement recognized directly in equity (except for the cases when total amount of re-measurement effect for the period is not material; then it is recognized in the consolidated income statement) until sold when gain/loss previously recorded in equity recycles through the consolidated income statement, except for impairment losses, foreign exchange gains or losses and interest income accrued using the effective interest method, which are recognized directly in the consolidated income statement. The Group uses market prices to determine the fair value for the Group s debt investments available for sale. If the market for debt investments is not active, the Group establishes fair value by using a valuation technique. Valuation techniques include using recent arm s length market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Group uses that technique. Dividends received are included in dividend income in the consolidated income statement. Non-marketable equity securities are stated at cost less impairment losses, if any, unless fair value can be reliably measured. When there is objective evidence that such securities have been impaired, the cumulative loss previously recognized in equity is removed from equity and recognized in the consolidated income statement for the period. Reversals of such impairment losses on debt instruments, which are objectively related to events occurring after the impairment, are recognized in the consolidated income statement for the period. Reversals of such impairment losses on equity instruments are not recognized in the consolidated income statement. Property, equipment and intangible assets Property, equipment and intangible assets, acquired after 1 January are carried at historical cost less accumulated depreciation and any recognized impairment loss, if any. Property, equipment and intangible assets, acquired before 1 January are carried at historical cost restated for inflation less accumulated depreciation and any recognized impairment loss, if any. Depreciation on assets under construction and those not placed in service commences from the date the assets are ready for their intended use. Depreciation of property, equipment and intangible assets is charged on the carrying value of property, equipment and intangible assets and is designed to write off assets over their useful economic lives. It is calculated on a straight line basis at the following annual prescribed rates: Buildings and other real estate % Computer equipment % Vehicles % Furniture and other fixed and intangible assets 5 25 % Leasehold improvements are amortized over the shorter of the lease period and the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. The carrying amounts of property, equipment and intangible assets are reviewed at each balance sheet date to assess whether they are recorded in excess of their recoverable amounts, and where carrying values exceed this estimated recoverable amount, assets are written down to their recoverable amount. 15

18 Taxation Income taxes expense represents the sum of the current and deferred tax expense. The current taxes expense is based on taxable profit for the year and is computed in accordance with legislation. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s current tax expense is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. The Republic of Belarus also has various other taxes, which are assessed on the Group s activities. These taxes are included as a component of operating expenses in the consolidated income statement. Deposits from banks and customers Customer and bank deposits are initially recognized at fair value. Subsequently amounts due at fixed maturities are stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the consolidated income statement over the period of the borrowings using the effective interest method. Those that do not have fixed maturities are carried at amortized cost based on expected maturities. Debt securities issued Debt securities issued represent promissory notes, certificates of deposit and debentures issued by the Bank. They are accounted for according to the same principles used for customer and bank deposits. Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made. 16

19 Financial guarantees contracts issued and letters of credit Financial guarantees contracts and letters of credit issued by the Group are credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. Such financial guarantees contracts and letters of credit issued are initially recognized at fair value. Subsequently they are measured at the higher of (a) the amount recognized as provision and (b) the amount initially recognized less, where appropriate, cumulative amortization of initial premium revenue received over the financial guarantee contracts or letter of credit issued. Share capital Contributions to share capital, made before 1 January are recognized at their cost restated for inflation. Contributions to share capital after 1 January are recognized at cost. Non-cash contributions are included into the share capital at fair value of the contributed assets. Contributions made in form of cash burdened with obligation to grant loans on lower than market terms are recognized at an approximated fair value of respective assets as of the date of contribution. Contributions made in form of loans to the contributor (including Government s contributions made in form of government bonds) burdened with obligation to grant loans on lower than market terms are not recognized until the loans are issued. Treasury shares are recognized at cost. Treasury shares repurchased before 1 January are carried at cost restated for inflation. Preferred shares that are non-redeemable are classified as equity. Dividends on ordinary shares are recognized in equity as a reduction in the period in which they are declared. Dividends that are declared after the balance sheet date are treated as a subsequent event under International Accounting Standard 10 Events after the Balance Sheet Date ( IAS 10 ) and disclosed accordingly. Retirement and other benefit obligations In accordance with the requirements of the Belarusian legislation, the Group withholds amounts of pension contributions from employee salaries and pays them to the state pension fund. Such pension system provides for calculation of current payments by the employer as a percentage of current total disbursements to staff. Such expense is charged in the period the related salaries are earned. Upon retirement all retirement benefit payments are made by pension funds. The Group does not have any pension arrangements separate from the State pension system of the Republic of Belarus. In addition, the Group has no post-retirement benefits or other significant compensated benefits requiring accrual. Recognition of income and expense Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest rate method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interest income also includes income earned on investments in securities. 17

20 Loan origination fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in the consolidated income statement over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in the consolidated income statement on expiry. Loan servicing fees are recognized as revenue as the services are provided. Loan syndication fees are recognized in the consolidated income statement when the syndication has been completed. All other commissions are recognized when services are provided. Other income is credited to consolidated income statement when the related transactions are completed. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated into BYR at the appropriate rates of exchange ruling at the balance sheet date. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transaction. Profits and losses arising from these translations are included in net gain on foreign exchange operations. Rates of exchange The exchange rates at year-end used by the Group in the preparation of the consolidated financial statements are as follows: BYR/USD 2, , BYR/EUR 2, , BYR/RUB Offset of financial assets and liabilities Financial assets and liabilities are offset and reported net on the balance sheet when the Group has a legally enforceable right to set off the recognized amounts and the Group intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In accounting for a transfer of a financial asset that does not qualify for derecognition, the Group does not offset the transferred asset and the associated liability. Accounting for the effects of hyperinflation The Republic of Belarus was considered to be hyperinflationary in and prior years as defined by IAS 29. Accordingly, the comparative amounts to these consolidated financial statements were adjusted and reclassified to include restatement, in accordance with IAS 29, for changes in the general purchasing power of the Belarusian Rouble for the hyperinflationary years ended. The restatement was made using the Consumer Price Index ( CPI ), published by the Ministry of Statistics and Analysis of the Republic of Belarus. The CPIs for the five years ended were as follows: Year % change 8% % % % % 18

21 Monetary assets and liabilities were not restated because they were already expressed in terms of the monetary unit current as of. Non-monetary assets and liabilities (items which were not already expressed in terms of the monetary unit current as of ) were restated by applying the relevant index. The effect of inflation on the Group s net monetary position was included in the income statement as loss on net monetary position for the respective reporting period. Amounts included in the income statement have been indexed by the change in the CPI based on the following assumptions: inflation has occurred evenly over the year; income and expenses have accrued evenly over the year. Restatement due to changes in IFRS Amendments to IAS 39 Financial Instruments: Recognition and Measurement ( IAS 39 ) effective for accounting periods beginning on 1 January imposed restrictions on use of designation of financial assets or financial liabilities at fair value through profit or loss at initial recognition. The Group de-designated all its financial assets previously designated at fair value through profit or loss since they do not qualify for such designation in accordance with amended IAS 39. These financial assets are classified as investments available for sale and accounted for as such (Note 16). De-designation was made retrospectively as required by transitional provisions of IAS 39. Fair value adjustments previously recognized in the income statement were immaterial and were not reclassified to equity. Prior period restatements In the financial statements for the year ended, the Bank did not consolidate its subsidiary PUE Ozeritskiy-Agro. Consolidation was performed in the financial statements for the year ended. The restatement effect of consolidation of this subsidiary as of is as follows: Consolidated balance sheet/ consolidated income statement item Amount as per the previous report Effect on the consolidated financial statements items Amount as per current report Total assets as of 2,653,133 23,238 2,676,371 Total liabilities as of 1,934,428 17,452 1,951,880 Total equity as of 718,705 5, ,491 Treasury shares as of - (35) (35) Net profit for the year ended 1,180 5,821 7,001 Reclassifications Certain reclassifications have been made to the consolidated financial statements as of to conform to the presentation as of as current year presentation provides better view of the financial position of the Group. The amount of deposit in the National bank of the Republic of Belarus in excess of daily minimum deposit requirement was included into the cash and cash equivalent. As a result cash and cash equivalents as of and 2004 increased by BYR 18,630 million and BYR 993 million, respectively. The effect of foreign exchange rates changes on cash and cash equivalents and monetary items denominated in foreign currencies was separately disclosed in the cash flow statement for the year ended. 19